BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 11/2000:
Fiscal Explanations for Inflation: Any Evidence from Transition Economies?
Tuomas Komulainen ()
and Jukka Pirttilä ()
Abstract: Recent arguments, motivated partly by the new fiscal
theory of price level, suggest that fiscal deficits undermine price
stability in transition economies. This paper addresses these claims by
examining vector-autoregressive models of inflation for three crisis-hidden
transition economies (Bulgaria, Romania and Russia). The results indicate
that while fiscal deficits have increased inflation in Bulgaria to a
certain extent, this has not been the case in Romania and Russia. Even in
the Bulgarian case, the usual money aggregate has proven more influential
to inflation than fiscal deficits. The analysis based on this method
therefore suggests that monetary policy plays an influential role in
inflation determination in these countries. In other words, inflationary
financing of deficits, rather than deficits themselves, accounts for
inflation.
Keywords: fiscal policy; inflation; vector autoregressive models; transition economies; (follow links to similar papers)
59 pages, November 6, 2000
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